What Is a Trade War? Here’s What Economists Are Worrying About

In a two-week span, U.S. President Donald Trump ordered up an array of tariffs against numerous countries, blocked Chinese takeovers of U.S. companies and sought new restrictions on future Chinese investment. Economists are warning that the world is on the verge of an all-out trade war, featuring tit-for-tat reprisals, heated rhetoric and appeals to the World Trade Organization, which may be ill-equipped to respond. If Trump’s trade provocations mushroom out of control, dozens of border-opening trade deals negotiated over several decades could be shoved aside. The prospect of slower economic growth has stock markets worldwide reeling.

1. What is a trade war?

The dictionary says it’s “an economic conflict in which countries impose import restrictions on each other in order to harm each other’s trade.” Trump’s tariffs and the threatened retaliation from other countries meet this definition, but so do centuries of protectionist skirmishes by numerous countries in countless sectors. The recent escalation is stoking fears that Trump has touched off a full-blown trade war by singling out of China for retaliation for intellectual property theft. The quid-pro-quo actions by the U.S. and China over steel tariffs, Trump’s invocation of national security to justify some of his moves — which could open a Pandora’s Box of similar claims by other nations — and Trump’s threat to further punish the EU if it imposes counter-duties also add to the trade-war atmospherics.

2. What happened in previous trade wars?

One of the most notorious examples is the Smoot-Hawley Act passed by Congress in 1930 and often blamed for deepening the Great Depression. The law hiked U.S. tariffs by an average of 20 percent, initially to protect American farmers but then broadened as other industries lobbied for protections. As demand collapsed, countries scrambled to maintain their gold reserves by devaluing their currencies or imposing even more trade barriers. Global trade fell off a cliff.

3. Who wins in trade wars?

No one, if history is any guide. When President George W. Bush raised steel tariffs in 2002, U.S. gross domestic product declined by $30.4 million, according to the U.S. International Trade Commission. The U.S. lost about 200,000 jobs, about 13,000 of which were in raw steel-making, by one estimate. A report by the pro-free trade Peterson Institute for International Economics estimated that Bush’s tariffs cost about $400,000 for every steel-industry job saved. The World Trade Organization also ruled that the Bush tariffs were illegal.

4. What has Trump done so far?

He’s imposing tariffs on up to $60 billion of as-yet unspecified products imported from China in retaliation for what he calls decades of intellectual property theft. He imposed tariffs of 25 percent and 10 percent, respectively,…

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